Sunday, May 29, 2011

Bail-Out

It's said more politely, and is often laced with euphemism and even humouring. There are a hundred ways to get it across. Still, those hundred variants meant exactly the same thing:

“You’re fired.”

Hugh Mueller shook his head rapidly, to get those words out of his seared inner eye. The taxi still stopped, he could not get away. The foreboding words came from a restaurant, of all things. After blinking, and running two fingers across his forehead, he looked again and saw “Our fried chicken can’t be beat!” It was in the more modest, more picturesque part of the city he was passing though to get back from his interview. He had just been feted for running the #1 large fund of 2013. The interview went well; the interviewer had been congratulatory without being fawning. All of the questions were of the “how’d you do it?” variety. Standard for the winner.

He was the manager of the Japteus gold fund, had been since 2006. The return on the fund had actually been much better in 2009, but then the fund had been small. As knowledge of gold’s gains had spread, and the now-exploded deflation scare had turned into universal recognition of the inflation problem, the trickles into Japetus’ coffers has become a flood. With the press that the award had gotten, the flood had become an inundation.

Maybe that illusion had come from the taxi driver. Mueller had been using taxis regularly since late 1998, when he started off as an analyst. He had landed in the gold field by accident. Like so many of his peers, he had tried to hold himself up as a high-tech analyst. Having tried for the brass ring, he became familiar with the world of first, second and third interviews. He had garnered several first interviews, but only three seconds and one third. That one, he had blown because he was not technical enough. The firm was targeting the swelling accounts of programmers and Internet mavens, and wanted the tech equivalent of a detail man. He got beat out by someone whose MBA was about the same as his but had designed an HTML Webpage on the fly in the interview.

The offer from Japetus, in retrospect, was a lucky break. He had sent his résumé as part of a flood in the hopes that a scatter-shot approach would turn up some prospects. The name of the game was to collect several job offers from lacklustre companies, then use them as leverage in the interview process for the sought-after jobs. Dropping the fact that one had a job already waiting, made one more desirable to the interviewer: such was the game plan. It had worked, but not enough for young Hugh Mueller. The cream of the crop went to the top, and he wasn’t among the top. Nor could he make up for it by any greater technical skill than familiarity with the jargon.

Japetus, around since 1978, had been looking for a new junior analyst to fill the shoes of a retiree: that was the only way they could justify a new hire back then. Having been thwarted, Hugh had accepted the offer as a way of marking time. Sure, gold had been dead, but he had thought he could put in time and draw a salary in a beaten-down job that seemingly had no future. Nine-to-five’ ing would free up his time in the evening to bone up on HTML, Perl, and the then-new language PHP. That way, he could jump back into the big arena and grab one of the plums.

Six months on the job had cured him of that desire. The CEO of the fund-management company, a cynical but cheery old gent by the name of Maurice Perrin, had walked him through what a bubble was and how it got people deranged. By May of 1999, young Mueller was convinced that the Internet was a bubble. He saying so to his friends, which Mr. Perrin also recommended, had hazed him into the right attitude for his future life. They thought he was nuts. Thankfully, they had no opinion on gold that would have compounded his alienation. That came later.

When the bubble broke in March of 2000, Mueller was already devoting his evenings to pick up what he could on gold-mining geology. While on the job, the easiest part for him to learn was hedging; it had the closest tie to what he had learned in business school. When he had enthused about methodologies to forecast earnings, his older colleagues smiled at him. “Find out what the price of gold will be and then plug it into your crystal ball.”

He found out that even calculating intrinsic value was problematical. Thus hazed, he adapted himself to the more standard metric: gold companies' net asset values at present gold prices. The custom of taking the mean of the average gold prices over the last three years, standard for exploration companies' economic assessments and feasibility studies, he went along with because there was nothing better.

2001 was the year that gold took off and tech cratered. Mueller was very glad he hadn’t got the dream job he had sought so eagerly three years prior. It would have been two years of glory and one year of sweating, followed by a canning and possibly an indictment. As the stocks he watched took off, he found his friends starting to joke about his field. He heard that, as a gold man, he should put his salary into a retreat a hundred miles from nowhere and stock up with food and guns. He heard veteran gold men he respected, some he admired, being described as mentally pathological. His alienation became complete; soon, his only friends were in the gold world. Banded together like outcasts all over the world, they bonded by reminding each other of the inevitable fate of fiat currencies everywhere.

Further adding to his newfound clannishness was the sight of Japetus piling up double-digit gain after double-digit gain – and no-one caring. 2001 saw a percentage gain that any other fund manager would kill for. Japetus managed $739 million in May of 2001. May of 2002, long after 2001’s gain of 109% was published and even made the base of advertisements, its assets under management were $932 million. Not only was there hardly any new business, but also many of the clients had cashed out some. Some, he had found out, had cited the work of someone by the name of Robert Prechter, an Elliott Wave specialist.

How long ago that was! Back then, when he had treated himself to a taxi, all he had gotten were blank stares and discussions of basketball games by the drivers. Content in his safe subculture, Mueller knew well what his new friends meant when they flipped off about the “sheeple.”

This year, the driver had known who he was on sight. Rather than fawning, he was bending Mueller’s ear about the opportunities in exploration stocks. “Rowntree Gold!” he enthused through his rounded black moustache. “Symbol R-W-G. RTG was taken, you see.

“Around fifty cents two years ago. Now? It’s more than eight bucks! A guy I know, he put his life saving into it when the explorers sold off. He sold it at seven, and now owns three cabs. There’s room for you to get in. You see, he couldn’t believe his good luck so he got nerves and sold. Never had the taste for it; he’s old-fashioned. I got 10,000 shares, and I tell you: twenty-five, easy. Fifty’s not out of line.”

Turning off his mouth, the driver’s black eyes saw an oddly nervous man in a two thousand dollar suit. It was the same guy: small pot belly, medium height, a full head of straight brown hair neatly coiffed, roundish face, thin eyebrows, fashionable small square glasses, light blue silk shirt. The same guy he had seen on those podcast interviews, excerpted from the business channel. The same guy he had read being quoted all the time. The same guy, on the top of the world, sweating as if it were a seventeen-year-old noob behind the wheel. “Hey, what’s it with you? I been driving twenty years, and I haven’t had an accident!”

The vision was still dogging Mueller as he rose up the elevator to the twelfth floor. The new building, where Japetus had relocated in 2009, was the opposite of nondescript. Thanks to the ’08 crisis, the firm had gotten a good deal on a full-floor suite in a skyscraper that the boys would have laughed at back when gold started its magnificent run. When Mueller had become a full analyst, there were only four others. Now, there were thirteen and two interns. He had been amazed at the number of résumés that had come in for those two positions. Back in 1998, there had only been two other competitors for the slot he got. Now, he had to wade through hundreds for only two unpaid internships.

The first intern, Dalia Mather, was in charge of reviewing the exploration stocks’ net asset values. The second, Adam Downie, was the analysts’ dogsbody. Mueller had asked Dalia to run through Japetus’ holdings, tabulate the net asset value per share of each, and compute a weighted average giving the net asset value per unit of the fund. It now boasted assets of more than $27 billion.

She was a dark-haired neat young woman who was in for the summer. Not much shorter than him, nature had blessed her with a small upturned nose that complemented her dark fine features. She would return to a final year of study in one of the best business schools in the country. Her future was assured, and she was convinced the future was in gold. Her suits were pedestrian, her grooming was tasteful, her self-confidence was Ivy-League élite, her manner was upbeat. Smiling as she brought the figures into the office, she chirped that the premium over the companies’ net asset value said that gold wouldn’t be long at $3,000.

Feeling his chest tighten, Mueller asked her if she had comped it out.

“Yep,” she answered bright-eyed. “Everything works out if gold goes to $4,800. Give it a year or so and we’ll be there.”

His chest pain gone, he found he became a zombie. Now detached, he saw and felt himself thanking her and exchanging pleasantries. When she left, he turned back to his work and ran though the list. Stock after stock, showing premiums over net asset values that were way out of whack.

The zombie that was him got through the day. The earlier urge of his eyes to clutch randomly at his surroundings was gone. Walking around the workstation-filled main office, with quasi-office cubicles for each analyst, he spent quality time interfacing with them. Most treated him with deference and respect. Egon, Wayne, Karl and Seth – the old boys who had been there when Mueller had joined – winked at him. All of them were older, and all had genially acceded to him being the catbird kid. They didn’t mind because they preferred staying in the shadows, and everyone knew that the big boss was really in charge. All of them left at 5:00, which none of the new kids did. Preferring the freedom of the private investor, they played their retirement accounts in a manner that would get them charged and run out of the business had they been fund managers. Wayne’s and Seth’s net worth were higher than Meuller’s.

After the interfacing was done, Egon and Wayne looked at each other. Something had seemed wrong with the kid. After conversing for thirty seconds, they figured it was the interview. Part of the poor kid’s job was to be a come-on for the sheeple: he had to be in the throes of the jitters. The newer employees noticed nothing wrong, chalking up their boss’ remoteness to overwork.

Still in zombie mode, when his day was done, Mueller greeted his kids while they were getting ready for bed; it was that late when he finally got to his two-story condo. Both Scotty and Freddie were enrolled in the Hartley School, not the best in the city but close.

At first, his wife Gloria though he was tired. It has been a great day for him, and national recognition can be stressful sometimes. After the kids had gone to bed, her gray eyes looked concernedly at his glassy ones. “You’re tired,” she stated.

Jolting out of his zombie persona, he blurted out: “No, not yet - but I’m going to be.”

Surprised, she didn’t know until he had unburdened himself that he had heard:

“You’re fired.”

Gloria was a compact, red-haired woman who had been a college libertarian. She was seven years younger than her Hugh, who had went gaga over her when she had met him at a gold seminar. She was wasp-waisted, attractive, studious, and genuinely interested in gold. She didn’t know that a large part of her appeal was based in she respecting what every other gal looked blankly at. She was an attractive, young, available woman who liked what far too many others had laughed off. They were married a year after they first met, on June 15, 2002. The ides of June.

She had gone straight from college to homemaking, which used to bother her. Now, it didn’t. She had fit well into the tight-knit gold world, and she was fitting in to the larger and more exclusive world her high-flying husband had brought her to. The stories she had heard from the other wives in their new circle didn’t register: she was sure that her husband didn’t even think of other women except as people. Unlike the other wives.

The celebration she had planned, a catered lobster dinner, he gnawed through as he mulled over what he had gone through after the interview. His eyes were jerking to the dishes, cutlery, decorative candles and even the pattern in the tablecloth. In order for the stocks Japetus held to be fairly valued, gold would have to go to almost $5,000. That price came close to discounting an outright return to the gold standard. Money was flooding in, hot money that expected another doubling in 2014. He was almost certain to get a raise, which would push his annual compensation into seven figures. All he had to do was to increase his beta relative to gold. Surely, $5,000 was inevitable – wasn’t it?

After the dinner and talk, his wife had gone from proud to concerned to confused. She had seen him stressed, but never like this. She found herself gently suggesting that he see a therapist. Something was wrong: on the day he should be triumphant, his self-esteem was worrisomely low.

“I’ll be in bed shortly,” he said when 10:00 approached. Nodding, sadly, she went upstairs to the master bedroom – leaving him to face the sweating and chest-tightening that his good fortune had bestowed upon him. Sure, he could take on more risk. Surely, gold had a long way to go. Even the taxi drivers were making money hand over fist!

Scuttling to his home office, the second room on the right in the hall tastefully hidden from the monstrously sized main vestibule/living room/dining room, he looked up Rowntree Gold on the computer. It was located an hour’s drive away from Skern River, an old mining town that had once again visited by good fortune. Three mines were within commuting distance of the town. Jerking up another browser window, he entered the search string “Skern River Real Estate.” Robotically going through the listings, he found houses like the one he had grown up in for between $300,000 and $400,000 – far less for the down payment on his condo. It wasn’t a penthouse suite, but it was contained in number seventeen on a list of the twenty most exclusive developments in the city. He had seen so in a magazine.

Breathing heavily, he set down to his chore of beta adjustment. Japetus had gone cloud, so he could access the virtual part of his office from his desk and chair at home. He had finished the calculations at 2:00. The shuffle he planned would boost Japetus’ gold beta from 1.48 to 2.53. Sure, it was risky, but what other way could he expect to keep the flood of new money happy? How else could he prevent the excited money from becoming angry money, which would gut the fund he ran? Didn’t he owe it to the firm to squeeze as much out of the bull market as was possible? Sure, it meant the fund would be jacked up from 19% exploration issues to about 45%, but that’s what everyone wanted, didn’t they?

Looking back at the house listings, he felt himself jerkily printing out a few. Skern River was a six-hour drive. He could go down, get in his BMW, drive up, and arrive in time for the real-estate agents to be open. Yes, that was the way out. He wouldn’t be fired at all – he’ll quit! Yes, that way was freedom.

The payments on the condo were onerous, but it would sell quickly. He could have his home sold in a week, and net more than enough to buy a Skern River house with cash. His kids would go to the local school – they would have to be pulled out of Hartley – and his wife would fit in fine. Maybe they’d homeschool; maybe he himself would teach them. Neither he nor Gloria had hailed from the august circle they frequented now, but they were accepted now. He was a big fund manager, whose name and face frequented the business media. They would be accepted easily in the more relaxed ambience of Skern River. There were a lot of miners, and he had worked in gold for his entire working life. They’d get along, he told himself.

With that desire, which he thought was a plan, Mueller walked to the vestibule and got his coat and street shoes from the closet. Checking to make sure he had his wallet and keys, he numbly walked out to the elevator that would take him to the parking garage and freedom.

Only a few lonely trucks passed him on the opposite side of the road over the last five minutes as he sped along the two-lane highway, settled into the leather of his chair. Even when the road was straight enough for his high beams to vanish off into flatness, he could see no cars moving in his direction. Except for those lonely trucks, he was blessedly alone. His driving became more and more automatic as he approached the freedom of Skern River.

He knew he would have to crack down once he made the offer on a home like the one he had grown up in. Gloria hailed from a similar neighbourhood; she could lose her new-found vanity. Wasn’t that it? Vanity? Who did they really think they were? Who did his new-found buddies, several of which commanded assets of more than $100 billion for companies that owned dozens of funds, think they were? Flotsam, on a bull market. Nothing more.

That subject disposed of, he drifted back to the memories of the good old days when his world was cozy and small. Sure, Japetus had been looked down on; that had hurt at first. But weren’t all pioneers? They were the ones with the lock on the future; they could see the turmoil and chaos the financial world would go though long before everyone had stopped laughing at him. The gold word was tight-knit and safe. Back in the days when an internship would have been unfilled: those were the good old days. The days when believers in gold were the vanguard, which more than made up for the empty dollars scooped up by the sheeple. Most of his former friends were making more than he at that point, but he was happier because he was with the future. Yes: those conformist dullards, who would be flapping around like oil-drenched wildfowl when the awful days of reckoning hit them, would finally see. O laugh now, ye who shall weep!

Why did so many now want to invest with him? He had seen them, buttonholing him in the upscale malls he went to with Gloria and the kids. Some of them looked as if they wanted his autograph, yet they were the ones who had laughed at him in those happy days when gold had turned majestically around. Blinking, feeling as if his eyelids had weights attached to them, he noticed that his car had begun weaving a little. He was driving ten below the speed limit, uncharacteristically slowly for him. It was now 4:27 AM.

Skern River: that was freedom. Or at least it seemed to be.

The lights in the opposite lane went from cheery to painful. Blinking robotically, Mueller realized that he had left his high beams on. Flicking the left lever, he was rewarded with the other lights diminishing to pleasant.

A hardened feeling then overcame him. Those new investors, they were really speculators. They wanted to make a quick buck. With the clarity of someone who claimed a psychic experience, Mueller was sure that they were the same people who made fun of him. Now they wanted a guaranteed double with him as the point man. For the first time on his ride, he considered turning around and going home.

Yes, it would be easy to shoulder that additional risk. He could warn the old boys, just by emphasizing the popularity of Japtus. They would see what he was doing. They knew what it meant when the sheeple flocked around you. Even if they didn’t, he could make them clue in otherwise. As for the rest, they deserved what they got once the great bull market was over. Like lemmings, they were just answering their fated call.

Now blinking loggily, he saw that he was in the middle of the road. Yes, his fine expensive BMW was straddling the single broken yellow line. His body now bunched up by his new line of thought, he concluded that he had every right to both lanes. Wasn’t he friend and neighbour to the Masters of the Universe? Weren’t people who used to scorn him now begging for his attention? He saw the image of the young, neat, educated, well-made-up, smiling Dalia Mather and suddenly felt a rush of lust through his loins. He was a Master of the Universe!

Moving to the right lane, although shakily, he let his concentration drift towards his intern’s “continuing education.” Yes, it looked like his fantasy of seeing her dark, shiny hair cover her whimpering head as her breasts rubbed against his desk was keeping him awake and energized. Deciding that he could drive like the best of them, he pumped down the accelerator until his speed was twenty above the limit.

The transport truck coming around the curve bothered him not at all, as he was a god. Looking down at the tenting of his $2,000 suit, the highway horn from the vehicle barely registered as he gazed down in wonder at his mastery…

…and his flayed heart separated from his aorta as the front crumpled.

Gloria’s face was masklike underneath her tasteful black hat. Her kids’ veered from crushed to unbelieving. Neither had cried, yet.

The coffin had to be closed: the accident that had killed her husband and father of her two children had been that bad. In retrospect, it had been obvious that there was something very wrong with him. In lieu of flowers, Hugh Mueller’s funeral announcement had asked that donations be made to a bipolar disorder foundation.

The wake had been well attended. His new friends had been smoothly sad; his old friends were distraught. Hugh had not really known how liked and respected he had been in the gold world. Gloria counted eight CEOs of mining companies who had shown up. She had met some of his university friends. All of them were saddened, all regretful, and some looked guilty. Every one of them took the view that old Hugh had been a destined high flyer whose greatness had been tragically cut off. All of them had donated to the bipolar foundation, as it neatly explained the odd career path he took before his inevitable success enveloped him.

Maurice Perrin looked and acted as if he had lost a son. “If he had only come and talked with me!” Miserably, Gloria began counting the times he had said that: she was up to ten.

She had found comfort in the words of his gold-loving compadres. Her misery temporarily lifted when the new widow that was she heard that her husband had been head and shoulders above the sheeple. Her children would be raised with the vision of their father as a solid, calm, kind, modest, unflappable man who did not mind being laughed at.

Originally, The Gold Bubble was a perch for me to watch what I pegged as a nascent gold bubble - or, to be less controversial, the third stage of a long-term gold bull market.

As time went on, I drifted towards commentary on gold and the greenback, plus the interrelation between the two. The rest of the posts featured items about gold that I thought were interesting. I ended up diverging from the theme that the title promised.

So, I've reactivated the old blog under a different name. "The Gold Watcher" is a more accurate title for the blog that The Gold Bubble became.

The Enter Stage Right article that kicked off the predecessor blog contains a fuller explanation of my reasoning about a gold bubble: it's here. A sequel is here.

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Disclaimer

Although I try to compensate, I do have opinions that are almost certainly influenced by what I've done with my own money. For the record, I am long gold-exploration stocks. On the odd chance I mention one that I own, I'll disclose it fully. I don't own any physical gold, nor do I own any producers or any well-known explorers.

Also, I must emphasize that I am not a registered investment advisor, and that I am not licensed to dispense investment advice in my jurisdiction of residence (Ontario, Canada). Consequently, this is not an investment-advice blog. It shouldn't be taken as such. I cannot provide any actionable material in the standard sense of the term; if you're intrigued by anything here, you'll have to see to your own trigger.

In addition to the standard boilerplate caution for you to do your own due diligence should you invest or speculate, I'd like to add a special caution: gold, by far, is the asset class that elicits the most emotions. A solid consensus of experieced investment professionals considers emotionality to be a performance-hobbler. In addition to doing your own research, and/or using a licensed professional to do so, I suggest that you watch yourself.